Monday, November 24, 2008

Facebook Valuation is like a Zillow Zestimate

The latest word on the street is that Facebook initiated discussions with Twitter for the purposes of buying the micro-blogging service. However, according to TechCrunch, the talks broke down partially because Facebook wanted to make the purchase with mostly stock (at a $15B valuation). The sticking point was that Twitter executives and investors didn't think that Facebook was actually worth $15B and decided against a deal. Even if Microsoft did just invest $240M into the company at that stratospheric valuation, other people were apparently not believers.

This same phenomenon is happening with Zillow Zestimates, at least here in the SF Bay Area. Zillow uses a proprietary algorithm along with historical home sales, local trends and lots of other 'black box' stuff to come up with a Zestimate (what your house is worth today) for your home. The problem is that this Zestimate is often times $50K-$200K higher than what you can actually sell it for (at least in the areas that I've looked). It obviously depends on each house, but most Zestimate values need to be discounted by a healthy percentage to get to a home's true value today.

While these two examples do not seemingly have any tie to actual car prices, they do underscore the need that all consumers have to know the actual price paid for something that has an opaque value (a house, a stock, or a car). In fact, the best way to know what something is truly worth is to know what someone else is willing to pay for it. With Facebook, Microsoft may have overvalued the company just for the opportunity to participate. With Zillow, since each house is different, each person's value will be different. With cars, which are commodities for the most part (with mileage, condition & location as the biggest variables), value can be derived directly from what other people paid for the same car.

With over 17,000 actual sales price data points for new & used cars, we're hoping that the actual values you see in our data will represent the true value of the car, not an inflated value that you don't completely trust.

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